Market Failure: Tragedy of the Commons (AQA A Level Economics)

Tragedy of the Commons

• Common pool (access) resources are natural resources over which no private ownership has been established. They are non-excludable but rivalrous in consumption
   

• Examples of common pool resources include

  • Oceans (especially international waters)

  • Natural forests and rainforests

  • Communal grazing land

  • Water sources such as rivers

• The tragedy of the commons (as explained by Garret Hardin in 1968) occurs when common pool resources are used in production in an unsustainable way

  • Left to the free market, there is no private ownership over these resources, as it is costly and inefficient to find ways to exclude other producers 

• This creates negative externalities of production and consumption 

  • There is no incentive for firms to reduce production levels as they seek to maximise profits. If an individual producer cut back production, other firms may then enter the market, causing them to lose out. Each private producer has the self-interest to keep exploiting resources

  • There is also no incentive for consumers to reduce consumption levels. If an individual consumer cuts back on consumption, other consumers will use the resource. E.g Excessive consumption of fish from a lake will deplete fish stock, exploiting resource

• The external costs of production and consumption often include pollution, environmental damage and resource depletion, which prevents future generations from benefiting in the same way. This results in partial market failure

Real World Example of the Tragedy of the Commons

• The Darién Gap is in Panama and is located on the border with Columbia

• This area is one of the most impregnable rainforests on the planet and is inhabited by indigenous tribes, drug traffickers, and para-military organisations

Diagram: Map of the Darien Gap in South America

The Darién Gap is a common pool resource

Background

• The Darién Gap is the only area where the 19,000km Pan American highway from Ushuaia (Argentina) to Prudhoe Bay (Alaska) is interrupted: a 62-mile gap

• Illegal logging has been steadily increasing

• The most valuable resource in the forest is the Rosewood Cocobolo tree which sells in Panama for $4,000 per m³ but in China for $12,000 per m³: this scarce resource is rapidly being depleted

• Loggers use the river system to penetrate deep into the forest

• Once the forest canopy is thinner, they bring in bulldozers and create illegal roads to speed up the extraction

• When they have left, palm oil entrepreneurs move in and plant palm oil trees

• Despite laws in place to protect the forest, there is no enforcement and corruption is common

• Hundreds of tons are shipped each year to China

• The indigenous tribes are waging war with the illegal loggers and there are frequently violent clashes and deaths

Solutions

• Several solutions have already been attempted by the indigenous community, including

  • Collective self-governance of the area

  • Forest mapping using drones

  • Using drones to gather video footage of the identity of the illegal loggers

  • Appeal  to the government by the three indigenous tribes for legal ownership rights to the land

  • Appealing for the creation and enforcement of international agreements on the sale of illegal timber
     

Evaluating Solutions to Common Pool Resources (in the Darién Gap)

An Evaluation of the Solutions used to Address the Tragedy of the Commons in the Darién Gap

Understanding Property Rights

• Property rights of common access resources are issued to define the ownership of a resource and set out how they can be used

  • If common land is given over to private ownership, the private owner has a strong incentive to manage the resource and take care of it for future use

Example of Property Rights to Resolve Tragedy of the Commons

Evaluating the use of Property Rights

• Allocating property rights to manage common resources poses challenges of equity, divisibility and enforcement

Problems with Allocating Property Rights